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Friday, October 22, 2021

No bottomless kitty

Suggestions for public expenditure must also account for opportunity costs.

Written by Bibek Debroy |
Updated: April 14, 2016 12:01:30 am
kolkata flyover, kolkata flyover collapse, kolkata news, what is act of God, flyover collapse, flyover collapse in kolkata, kolkata flyover accident, flyover accident in kolkata, kolkata, kolkata news, latest news kolkata The collapse of the Kolkata flyover, which killed 27 people, was described by its builders as ‘an act of God’, an expression that has a specific legal meaning.

A flyover collapsed in Kolkata and the incident was described as an act of god, at least initially. Diego Maradona’s “hand of god” was deliberate. This act of god was inadvertent. I doubt the individual who used the expression “act of god” initially, used it in the broader sense of divine intervention or wrath of god, which is how it seems to have been interpreted. He probably used it in the legal sense of force majeure, to circumvent culpability. Whether Kolkata or Kerala, crime is rarely punished. Except in the Dostoyevsky novel, crime and punishment rarely go together, more so in India.

If you use Bayesian notions of conditional probability, you will be dismayed.

In criminal cases, that is those with criminal culpability, what is the probability of an FIR being registered? What is the probability of a chargesheet being framed, given that an FIR has been registered? What is the probability of prosecution given that the chargesheet has been framed? What is the probability of conviction given prosecution? The final conditional probability is so minuscule that crime and malfeasance are low-risk and high-gain, instead of the desirable high-risk and low-gain. But let’s leave those criminal justice issues aside, salient though they are.

The flyover will be constructed, or reconstructed. This requires men, material and machines. There will be demolition costs and reconstruction costs perhaps 50 times the demolition figure. Let’s say a consolidated total of Rs 500 crore. Such expenditure is demand stimulus when cement and steel companies complain about lack of demand. Ergo, flyover collapses are good for growth. This is no different from the J.M. Keynes idea of employing men to dig up useless ditches and re-employing them to fill up those ditches, the idea of the multiplier expressed in more vivid imagery. There’s no evidence of Keynes ever having used this ditch metaphor. It seems to be more of a Joan Robinson interpretation of what Keynes might have written, or might have said. In any event, why shouldn’t we have more flighty flyover fabricators, since that’s good for growth? What’s wrong with applying the Keynes prescription to India? The fallacy is obvious and yet, not obvious.

The answer lies in the notion of opportunity costs, exemplified in the classic Lionel Robbins definition: “Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses.” When an economy is in a state of depression, there are unemployed resources and they don’t possess alternative uses. Other than such depressed states, men, material, machines and money can be deployed elsewhere.

Every time individual household budgets are managed, we remember the principle of opportunity costs. Hence the fallacy is obvious. Every time government budgets are mentioned, we turn oblivious. Thus, the fallacy is less than obvious.

This is a predilection even economists, who should know better, are prone to. I do wish more people would read what Frederic Bastiat wrote. He’s largely remembered for the petition of candle-makers. Candle-makers and tallow-producers jointly sign a petition against the sun, since it threatens them with unfair competition. Given what I started with, another Bastiat piece is more germane. A railway is built between Spain and France, to reduce transportation costs. However, since domestic producers in both countries suffer, producers in either country crave protection and lobby to increase tariffs. This neutralises the benefits from reduced transportation costs. Therefore, we arrive at the argument that the railway should be destroyed.

Even better, we arrive at a conceptual argument that there should be “negative” railways, since those bring clear benefits, just as we should have “negative” flyovers. Bastiat has been described as a “good economist”, that is, an economist who looks at general equilibrium, rather than the partial equilibrium most people, economists included, prefer.

Consider suggestions for public expenditure, by which many people mean Union government expenditure: 8 per cent for education, 6 per cent for health, 3 per cent for defence, 15 per cent for infrastructure, 5 per cent for subsidies, 2 per cent for law and order. When added, you begin to approach levels for countries like Finland. That’s fine, as long as tax/ GDP levels are like those in Finland. But since tax/ GDP levels aren’t like those in Finland, to be taken seriously, such suggestions should invoke opportunity costs and explain what expenditure will be foregone in the process. Governments (Parliament/ state legislatures) set their own expenditure priorities, given resource constraints. That’s the way indirect democracy works. Citizens have every right to question the efficiency of public expenditure and suggest alternative resource mobilisation channels. Indeed, citizens have every right to question government priorities too, and suggest their own, as long as there’s a sense of prioritisation and one doesn’t think there’s an infinite kitty of resources one can delve into. There’s a clichéd Micawber definition of happiness from David Copperfield: “Annual income twenty pounds, annual expenditure nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pound ought and six, result misery.”

I’m not sure citing this Micawber principle is appropriate. After all, Wilkins Micawber borrowed indiscriminately, was hounded by collection agents, ended in a debtors’ prison, and only found happiness by emigrating to Australia. Since the family was also imprisoned with the debtor, I wonder what Mrs Micawber, more importantly the twins, thought of Mr Micawber’s choices. Opportunity cost trade-offs aren’t only about the present. They also involve the future and the generations that follow. Considering such choices is true general equilibrium.

The writer is member, Niti Aayog. Views are personal.

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